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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 163 added, 172 removed, 428 unchanged (44% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our "Audited Consolidated Financial Statements"

and accompanying "Notes to Consolidated Financial Statements"

included elsewhere in this Annual Report.

The following discussion should be read in conjunction with our “Audited Consolidated Financial Statements” and accompanying “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.

In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from management’s expectations.

See “Forward-Looking Statements” and "Item 1A.

See “Forward-

Looking Statements” and “Item 1A.

Risk Factors” included elsewhere in this Annual Report.

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El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the LSR segment.

We strive to offer food that integrates the culinary traditions of Mexico with the

healthier lifestyle of Los Angeles, a combination that we call “LA-Mex.” Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken.

We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp.

We strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle of Los Angeles.

Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken.

We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like beef.

Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls.

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Our distinctive menu with “better for you” and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.

COVID-19 Impact

During the COVID-19 pandemic, we have experienced periods of significant disruption to our restaurant operations.

Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery).

COVID-19 pandemic and the measures taken to prevent its spread have adversely affected our operations and financial results, particularly during fiscal 2020 as well as periods of 2021 when COVID-19 infections increased with the spread of new strains of the virus.

The disruption in operations has led to us considering the impact of the COVID-19 pandemic on our liquidity, debt covenant compliance, and recoverability of long-lived and right-of-use (“ROU”) assets, goodwill and intangible assets, among others.

We are continually evaluating the impact of the global crisis on our financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary.

While all of our restaurants had dining rooms open as of December 29, 2021, we continue to experience staffing challenges, which resulted in reduced operating hours and service channels at some of our restaurants and resulted in higher wage inflation, overtime costs and other labor related costs.

Further, we experienced inflationary pressures due to supply chain disruptions that resulted in increased commodity prices and impacted our business and results of operations during the year ended December 29, 2021.

We expect these pressures to continue during fiscal 2022.

During fiscal 2021, we incurred $3.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

During fiscal 2020, we incurred $4.9 million in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

During fiscal 2021 as part of the CARES Act , we recognized the Employee Retention Credit (“ERC”) in the amount of $3.4 million, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021.

See additional information presented in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

Due to the rapid development and fluidity of this situation, we cannot determine the ultimate impact that the COVID-19 pandemic will have on our consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our consolidated financial condition, liquidity, and future results of operations is uncertain.

M arket Trends and Uncertainties

We may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business.

During the year ended December 28, 2022, we incurred a total of $3.3 million in COVID-19 related expenses, comprised of $2.3 million due to overtime primarily related to the first quarter and $1.0 million due to leaves of absence related to the remaining three quarters.

During the year ended December 29, 2021 and December 30, 2020, we incurred $3.9 million and $4.9 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.

In addition, while all of our restaurants had dining rooms open as of December 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs.

Labor costs could also be adversely impacted as a result of the FAST Act, which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages.

The FAST Act, which will take effect if approved by voters in November 2024, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants.

Further, this bill could prompt similar legislation in other states.

We also continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business and results of operations during the year ended December 28, 2022.

We expect these pressures to continue during fiscal year 2023.

Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact on our consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our consolidated financial condition, liquidity, and future results of operations is uncertain.

Growth Strategies and Outlook

We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies :

● develop a people-first culture;

● differentiate the brand ;

● simplify operations;

● accelerate new restaurant development.

As of December 29, 2021, we had 480 locations in six states.

In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one

in Louisiana.

In fiscal 2020, we opened one new company-operated restaurant in Nevada and our franchisees opened three new restaurants, two in California and one in Arizona.

In 2022, we intend to open three to six new company-operated and six to 10 new franchised restaurants.

● embed our unique El Pollo Loco culture ;

● build awareness and own our lane ;

● deliver exceptional service – profitably ;

● accelerate development.

As of December 28, 2022, we had 490 locations in seven states.

In fiscal 2022, we opened four new company-operated restaurants, two in Nevada and two in California, and our franchisees opened nine new restaurants, seven in California, one in Colorado and one in Utah.

In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one in Louisiana .

In 2023, we intend to open four to six new company-operated and eight to twelve new franchised restaurants.

To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend.

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In fiscal 2022, comparable restaurant sales system-wide increased 5.9%.

In fiscal 2020, comparable restaurant sales system-wide decreased 2.4%.

In fiscal 2021, comparable restaurant sales system-wide increased 12.1%.

In fiscal 2020, comparable restaurant sales system-wide decreased 2.4%.

Comparable restaurant sales growth/decline reflects the change in year-over-year sales for the comparable restaurant base.

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System-wide comparable restaurant sales include restaurant sales at all comparable company-operated restaurants and at all comparable franchised restaurants, as reported by franchisees.

Comparable restaurant sales at company-operated restaurants increased 7.6% in fiscal 2021, decreased 3.0% in fiscal 2020, and increased 1.9% in fiscal 2019.

For company-operated restaurants, the change in comparable restaurant sales consisted of a 6.3% increase in average check size and a 1.2% increase in transactions.

Comparable restaurant sales at company-operated restaurants increased 3.7% in fiscal 2022, increased 7.6% in fiscal 2021, and decreased 3.0% in fiscal 2020.

For company-operated restaurants in 2022, the change in comparable restaurant sales consisted of a 7.3% increase in average check size due to increases in menu prices partially offset by a 3.3% decrease in transactions.

In fiscal 2021, the increase in company-operated comparable restaurant sales consisted of a 6.3% increase in average check size and a 1.2% increase in transactions .

In fiscal 2020, the decrease in company-operated comparable restaurant sales was primarily the result of a decrease in transactions of 15.8%, partially offset by a 15.3% increase in average check size .

In fiscal 2019, the increase in company-operated comparable restaurant sales was primarily the result of an increase in average check size of 2.9%, partially offset by a decrease in transactions of 1.0%.

In fiscal 2022, comparable restaurant sales at franchised restaurants increased 7.4%.

In fiscal 2020, comparable restaurant sales at franchised restaurants decreased 2.0%, and in fiscal 2019, comparable restaurant sales at franchised restaurants increased 2.0%.

In fiscal 2021, comparable restaurant sales at franchised restaurants increased 15.3%, and in fiscal 2020, comparable restaurant sales at franchised restaurants decreased 2.0%.

Restaurant Development

In fiscal 2021, we opened two company-operated restaurants, and our franchisees opened two new restaurants.

In fiscal 2022, we opened four company-operated restaurants, and our franchisees opened nine new restaurants.

From time to time, we and our franchisees close restaurants.

In fiscal 2021, we closed one company-operated restaurant.

Our franchisees closed two restaurants.

In fiscal 2022, we closed two company-operated restaurants.

Our franchisees closed one restaurant.

Our restaurant counts at the beginning and end of each of the last three years were as follows:

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We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand.

As of December 29, 2021, we have completed 12 company-operated restaurants remodels using the new design, including 10 during fiscal 2021.

During 2021, our franchisees completed five remodels, two of

which used the new design.

During the year ended December 28, 2022, we completed six company-operated restaurant remodels and 16 franchise remodels using the new asset design.

In fiscal 2023, we plan to continue our standard practices for remodels, which includes completing a total of 10-15 company and 20-30 franchise remodels using the new design.

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Our Loco Rewards loyalty program offers rewards that incentivize customers to visit our restaurants more often each month.

Customers earn points for each dollar spent and as of August 4, 2020, 50 points can be redeemed for a $5 reward to be used for a future purchase.

Prior to August 4, 2020, 100 points could be redeemed for a $10 reward.

Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase.

If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire.

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The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.

We expect food and paper costs, particularly those items not subject to purchasing commitments, to increase in the short-term due to current inflationary pressures.

Labor and Related Expenses

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Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows.

Factors that influence labor costs include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include the FAST Act), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.

Occupancy Costs and Other Operating Expenses

Occupancy costs include rent, common area maintenance, and real estate taxes.

Occupancy costs include rent, common area maintenance (“CAM”), and real estate taxes.

Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.

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If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

When we close a restaurant, we will evaluate the ROU asset for impairment, based on anticipated sublease recoveries.

The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and common area maintenance (“CAM”) charges for closed restaurants.

Loss on Disposition of Restaurants

Loss on disposal of restaurants includes the loss on the sale of restaurants to franchisees, or other third parties, and includes the difference between carrying value and sales price of leasehold improvements, equipment and other assets included in the sale.

When we close a restaurant, we will evaluate the right-of-use (“ROU”) asset for impairment, based on anticipated sublease recoveries.

The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and CAM charges for closed restaurants.

(Gain) Loss on Disposition of Restaurants

(Gain) loss on disposal of restaurants includes the (gain) loss on the sale of restaurants to franchisees, or other third parties, and includes the difference between carrying value and sales price of leasehold improvements, equipment and other assets included in the sale.

Interest Expense, Net

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Occupancy and other operating expenses (1)

Gain on recovery of insurance proceeds,

lost profits (1)

Company restaurant expenses (1)

General and administrative expenses

Legal settlements

Franchise expenses

1 unchanged sentence

Loss on disposal of assets

Recovery of securities lawsuits related legal expenses and other insurance claims

Impairment and closed-store reserves

Loss on disposition of restaurants

(Gain) loss on disposition of restaurants

Total expenses

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Interest expense, net

Income tax receivable agreement expense

Income tax receivable agreement (income) expense

Income before provision for income taxes

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The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $14.3 million, or 3.7%.

The company-operated comparable restaurant sales increase consisted of an approximately 6.3% increase in average check size and a 1.2% increase in transactions.

In addition, company-operated restaurant revenue was favorably impacted by $3.7 million of additional sales from restaurants that had not been open the fifteen months required to be included in comparable restaurant sales and a $1.7 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the prior year.

This company-operated restaurant sales increase was partially offset by a $5.1 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during 2021 and a $0.5 million decrease in revenue recognized for our loyalty points program.

Company-operated restaurant revenue was also negatively impacted by $4.6 million for the additional week of operations in 2020 as it was a 53-week fiscal year.

See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

The company-operated comparable restaurant sales increase consisted of an approximately 7.3% increase in average check size due to increases in menu prices, partially offset by a 3.3% decrease in transactions.

In addition, company-operated restaurant revenue was favorably impacted by $3.5 million of additional sales from the opening of six restaurants during or subsequent to the first quarter of 2021.

This company-operated restaurant sales increase was partially offset by a $9.0 million decrease in revenue from the closure of three restaurants during or subsequent to the first quarter of 2021, the eleven company-operated restaurants sold by the Company to existing franchisees during or subsequent to the first quarter of 2021.

Franchise Revenue

In fiscal 2022, franchise revenue increased $4.5 million, or 13.3%.

This increase was primarily due to a franchise comparable restaurant sales increa se of 15.3%, the opening of five restaurants during or subsequent to the first quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the year.

This franchise revenue increase was partially offset by the closure of nine franchise locations during the same period.

This increase was primarily due to a franchise comparable restaurant sales increa se of 7.4%, the opening of eleven restaurants during or subsequent to the first quarter of 2021 and revenue generated from eleven company-operated restaurants sold by the Company to existing franchisees

during or subsequent to the first quarter of 2021 .

This franchise revenue increase was partially offset by the closure of three franchise locations during the same period.

Franchise Advertising Fee Revenue

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Food and Paper Costs

Food and paper costs increased $5.6 million, or 5.7%, in fiscal 2021, due to a $2.8 million increase in food costs and a $2.8 million increase in paper costs.

The increase in food and paper costs resulted primarily from a $0.9 million increase from restaurants opened during the current or prior year, higher company transactions and commodity inflation.

These increases were partially offset by a reduction of $1.4 million for restaurant locations sold to franchisees during fiscal 2021 and $1.2 million for the additional week of operations in 2020 which was a 53-week fiscal year.

Food and paper costs as a percentage of company-operated restaurant revenue were 26.4% in fiscal 2021, consistent with the prior year.

Food and paper costs increased $13.4 million, or 12.8%, in fiscal 2022.

The increase in food and paper costs resulted primarily from commodity inflation, partially offset by lower transactions.

In addition, the increase in food and paper costs resulted from a $1.1 million increase from restaurants opened during the current or prior year.

These increases were partially offset by a reduction of $1.5 million for restaurant locations sold to franchisees during the current or prior year.

Food and paper costs as a percentage of company-operated restaurant revenue were 29.2% in fiscal 2022, up from 26.4% in fiscal 2021 primarily due to commodity inflation, partially offset by an increase in pricing.

Labor and Related Expenses

Labor and related expenses increased $10.5 million, or 8.7%, in fiscal 2022.

The increase was due to a $4.0 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $3.0 million increase in overtime, a $1.3 million increase related to the 1.2% increase in year-over-year sales transactions, a $1.2 million increase from restaurants opened during or after the first quarter of the prior year, a $0.8 million increase in employee medical costs, $0.6 million in higher payroll taxes, a $0.7 million increase primarily related to employee training and a $1.9 million increase in other labor related expenses.

This labor and related expense increase was partially offset by recognizing a $3.4 million ERC, which is recorded as an offset to the corresponding payroll expense and is classified as part of the labor and other operating expenses on the consolidated statements of income for the year ended December 29, 2021.

See additional information presented in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

In addition, the labor and related expenses increase was partially offset by a reduction of $1.8 million in labor for restaurant locations sold to franchisees during fiscal 2021, a reduction of $1.6 million for the additional week of operations in 2020 which was a 53-week fiscal year and a reduction of COVID-19 related expenses of $0.8 million.

Labor and related expenses as a percentage of company-operated restaurant revenue were 30.5% in fiscal 2021, consistent with the prior year .

The increase was primarily due to a $8.2 million increase primarily related to minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressure.

Further, the increase for the year-to-date period was due to recognizing a $3.4 million Employee Retention Credit which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the consolidated statements of income during the year ended December 29, 2021.

In addition, the labor and related expenses were impacted by a $1.3 million increase from restaurants opened during or after the first quarter of the prior year and $1.0 million in higher payroll taxes primarily associated with the labor increases above.

The increase in labor and related expenses for the year-to-date period was partially offset by a $2.1 million reduction in labor related to the eleven locations sold to existing franchisees during the current or prior year and a $1.2 million reduction in restaurants closed during the current or prior year.

Labor and related expenses as a percentage of company-operated restaurant revenue were 32.4% in fiscal 2022, up from 30.5% in fiscal 2021 primarily due to the cost increases highlighted above, partially offset by the higher menu prices.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $4.0 million, or 4.1%, in fiscal 2022.

The increase was primarily due to a $1.4 million increase in market place delivery fees, a $1.0 million increase in utilities costs, a $0.8 million increase in advertising expenses, a $0.8 million increase in repair and maintenance costs, a $0.3 million increase in operating supplies primarily related to COVID-19 and a $1.1 million increase in other operating expenses.

These increases were partially offset by a $0.3 million decrease in occupancy costs, primarily related to a reduction in rent expense from restaurants sold to franchisees during 2021.

Occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.7% in fiscal 2021, consistent with the prior year.

Gain on Recovery of Insurance Proceeds, Lost Profits

In fiscal 2020, we received business interruption insurance proceeds of $2.0 million, primarily related to restaurant sales losses and expenses related to the COVID-19 pandemic and resulting dining room closures.

The increase was primarily due to a $2.4 million increase in utilities costs primarily due to increases in natural gas and electricity costs, a $0.6 million increase in market place delivery fees, a $0.4 million increase in freight fuel costs, a $0.3 million increase in repairs and maintenance and a $0.3 million increase in advertising expense.

Occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.2% in fiscal 2022, up from 24.7% in fiscal 2021 primarily due to the cost increases highlighted above .

General and Administrative Expenses

General and administrative expenses increased $3.9 million, or 11.0%, in fiscal 2021.

The increase was due primarily to a $1.4 million increase in legal expenses, a $0.9 million increase in labor related costs, primarily related to an increase in management bonus expense, a $1.2 million increase in recruiting costs and other outside services fees and a $0.5 million increase in other general and administrative expenses.

These increases were partially offset by a $0.5 million impact from an additional week of operations in fiscal 2020, which was a 53-week fiscal year.

General and administrative expenses as a percentage of total revenue were 8.8% in fiscal 2021, up from 8.4% in fiscal 2020.

This increase is primarily due to the cost increases described above, partially offset by higher revenue.

Legal Settlements

Legal settlements were $2.6 million in fiscal 2020, related to resolution of the longstanding lawsuit involving a contract dispute with one of the Company’s franchisees concerning asserted territory rights, as well as amounts incurred related to the payment of the final settlement amounts for consolidated wage and hour class action lawsuits resolved during fiscal 2020.

General and administrative expenses decreased $0.8 million, or 1.9%, in fiscal 2022.

The decrease was due primarily to a $1.1 million decrease in labor related costs, primarily related to a decrease in management bonus expense and a $0.4 million decrease in legal-related expenses.

The decrease in general and administrative expenses was partially offset by a $0.6 million increase in other general and administrative expenses.

General and administrative expenses as a percentage of total revenue were 8.3% in fiscal 2022, down from 8.8% in fiscal 2021.

This decrease is primarily due to the cost decreases described above and leverage on higher sales.

Franchise Expenses

Franchise expenses increased $3.3 million, or 10.2%, in fiscal 2022.

The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue and rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Recovery of Securities Class Action Legal Expenses and Other Insurance Claims

During fiscal 2020, we received insurance proceeds of $0.1 million related to a property claim.

See Note 13, “Commitments and Contingencies—Legal Matters” in the accompanying "Notes to Consolidated Financial Statements"

in this Annual Report.

The increase was primarily due to an increase in advertising expenses, primarily resulting from higher franchise revenue, higher franchise services expense and higher

rent expense for locations sub-leased to franchisees that have a portion of the rent based on a percentage of revenue generated.

Impairment and Closed-Store Reserves

During fiscal 2022, we recorded a $0.5 million non-cash impairment charge primarily related to the carrying value o f the ROU assets of one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in California.

During fiscal 2021, we recorded a $0.7 million non-cash impairment charge primarily related to the carrying value o f the ROU assets of one restaurant in Texas that closed in 2019, the carrying value of one restaurant in California that closed in 2021 and the long-lived assets of three restaurants in California.

During fiscal 2020, we recorded a $3.5 million non-cash impairment charge primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

During fiscal 2021, we recognized $0.4 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations .

During fiscal 2020, we recognized $1.2 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, we are monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis.

For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.

Loss on Disposition of Restaurants

During fiscal 2022, we recognized $0.3 million of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations compared to $0.4 million during fiscal 2021 .

Gain and Loss on Disposition of Restaurants

During fiscal 2022, we completed the sale of three company-operated restaurants within the Orange County area to an existing franchisee.

We determined that these restaurant dispositions represent multiple element arrangements, and as a result, the cash consideration received was allocated to the separate elements based on their relative standalone selling price.

Cash proceeds included upfront consideration for the sale of the restaurants and franchise fees.

The cash consideration per restaurant related to franchise fees is consistent with the amounts stated in the related franchise agreements, which are charged for separate standalone arrangements.

The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement.

This sale resulted in cash proceeds of $1.0 million and a net gain on sale of restaurants of $0.8 million for the fiscal year ended December 28, 2022.

These restaurants are included in the total number of franchised El Pollo Loco restaurants.

During fiscal 2021, we completed the sale of eight company-operated restaurants within the Sacramento area to an existing franchisee.

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Interest Expense, Net

For fiscal 2021, net interest expense, decreased by $1.5 million, primarily related to lower interest rates and lower outstanding balances on our 2018 Revolver (as defined below).

For fiscal 2022, net interest expense, decreased by $0.1 million, primarily related to lower outstanding balances on our 2022 Revolver (as defined below) during part of the year.

Income Tax Receivable Agreement

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The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods.

In fiscal 2021 and fiscal 2020, we recognized income tax receivable agreement expense of less than $0.1 million and $0.1 million, respectively.

In fiscal 2022 and fiscal 2021 we recognized income tax receivable agreement income of $0.4 million and expense of less than $0.1 million, respectively.

In fiscal 2022 and 2021, we paid $0.4 million and $1.7 million, respectively, to our pre-IPO stockholders under the TRA.

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In fiscal 2022, we recorded an income tax expense of $8.1 million, compared to income tax expense of $10.3 million in fiscal 2021, reflecting an estimated effective tax rate of 28.0% and 26.2%, respectively.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 26.2% for the year-to-date ended December 29, 2021 is primarily a result of windfall tax benefit related to stock options exercised and state taxes, a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 18.8% for the year ended December 30, 2020 is primarily a result of state taxes, windfall tax benefit related to stock options exercised and state taxes , a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction .

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 28.0% for the year ended December 28, 2022 is primarily a result of state taxes, the change in valuation allowance against certain state credits, a tax shortfall related to equity compensation and non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.

The difference between the 21.0% statutory rate and the Company’s effective tax rate of 26.2% for the year ended December 29, 2021 is primarily a result of windfall tax benefit related to stock options exercised and state taxes, a Work Opportunity Tax Credit benefit and the change in valuation allowance against certain state credits as a result of future forecasted income apportioned to the state jurisdiction .

Fiscal Year 2021 Compared to Fiscal Year 2020

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To evaluate the performance of our business, we utilize a variety of financial and performance measures.

These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes ("AUV"), restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes (“AUV”), restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.

In fiscal 2022, our restaurants generated company-operated restaurant revenue of $403.2 million and system-wide sales of $1,039.0 million, and system comparable sales growth of 5.9%, consisting of company-operated restaurant comparable sales growth of 3.7% and franchised comparable sales growth of 7.4%.

The company-operated comparable sales increase consisted of a 6.3% increase in average check size.

The company-operated comparable sales increase consisted of a 7.3% increase in average check size due to increases in menu prices and partially offset by a 3.3% decrease in transactions.

In fiscal 2022, for company-operated restaurants, our annual AUV was $2.1 million, restaurant contribution margin was 13.2%, and Adjusted EBITDA was $48.7 million.

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As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.

In addition, we expect our company-operated restaurant revenue and comparable restaurant sales to continue to fluctuate significantly due to the current COVID-19 pandemic.

See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.

System-Wide Sales

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Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP.

Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

Management believes that the presentation of system-wide sales provides useful information to investors because it is a measure that is widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.

The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue:

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Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check size, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.

Because other companies may calculate this measure differently than we do, comparable restaurant sales as presented herein may not be comparable to similarly titled measures reported by other companies.

Management believes that comparable restaurant sales is a valuable metric for investors to evaluate the performance of our store base, excluding the impact of new stores and closed stores.

Company-Operated Average Unit Volumes

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Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable.

Restaurant contribution excludes certain costs, such as general and administrative expenses, depreciation and amortization, impairment and closed-store reserve and other costs that are considered normal operating costs and accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of shareholders because of the exclusion of certain corporate-level expenses.

Restaurant contribution therefore excludes franchise revenue, franchise advertising fee revenue and franchise expenses as well as certain other costs, such as general and administrative expenses, franchise expenses, depreciation and amortization, impairment and closed-store reserve, loss on disposal of assets and other costs that are considered corporate-level expenses and are not considered normal operating costs of our restaurants.

Accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of shareholders because of the exclusion of certain corporate-level expenses.

Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.

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Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors.

our competitors.

Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance.

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Impairment and closed-store reserves

Loss on disposition of restaurants

(Gain) loss on disposition of restaurants

Restaurant contribution

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We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies.

Management believes that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies.

These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare our performance to that of our competitors.

We also present EBITDA and Adjusted EBITDA because (i) management believes that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) management believes that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to compare our performance to that of our competitors.

The following table sets forth reconciliations of our net income to EBITDA and Adjusted EBITDA:

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Impairment and closed-store reserves (d)

Loss on disposition of restaurants (e)

Income tax receivable agreement expense (f)

(Gain) loss on disposition of restaurants (e)

Income tax receivable agreement (income) expense (f)

Securities class action legal expense (g)

Legal settlements (h)

Pre-opening costs (i)

Executive transition costs (j)

Special legal expenses (i)

Pre-opening costs (j)

Adjusted EBITDA

(a) Includes non-cash, stock-based compensation, excluding stock-based compensation costs associated with the transition of our former CEO in fiscal 2019.

(a) Includes non-cash, stock-based compensation.

(b) Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

(c) In fiscal 2020, we received insurance proceeds of $0.1 million related to a property claim, and in fiscal 2019 we received insurance proceeds of $10.0 million related to the settlement of the securities class action lawsuit.

See Note 13 “Commitments and Contingencies—Legal Matters"

in the accompanying "Notes to Consolidated Financial Statements"

in this Annual Report.

(d) Includes costs related to impairment of long-lived and ROU assets and closing restaurants.

During fiscal 2021, we recorded non-cash impairment charges of $0.7 million, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California closed in 2021, and the long-lived assets of three restaurants in California.

During fiscal 2022, we recorded non-cash impairment charges of $0.5 million, primarily related to the carrying value o f the ROU assets of one restaurant in California that closed in 2021 and the long-lived assets of two restaurants in California.

D uring fiscal 2022, we recognized $0.3 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2020, we recorded non-cash impairment charges of $3.5 million for the year ended December 30, 2020, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

In fiscal 2021, we recorded non-cash impairment charges of $0.7 million for the year ended December 29, 2021, primarily related to the carrying value of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California closed in 2021, and the long-lived assets of three restaurants in California.

During fiscal 2021, we recognized $0.4 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

In fiscal 2019, we recorded impairment charges of $3.6 million, primarily related to the carrying value of the ROU assets of four restaurants sold to franchisees and one restaurant closed during fiscal 2019, and the long-lived assets of one restaurant in California.

Additionally, during fiscal 2019, we closed two restaurants in California and two restaurants in Texas and recognized $1.3 million of closed-store reserve expense, primarily related to the amortization, property taxes and CAM payments for our closed locations.

(e) During fis cal 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee.

In fiscal 2020, we recorded impairment charges of $3.5 million for the year ended December 30, 2020, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.

During fiscal 2020, we recognized $1.2 million of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.

(e) During fiscal 2022, we completed the sale of three company-operated restaurants within the Orange County area to an existing franchisee.

This sale during 2022 resulted in cash proceeds of $1.0 million and a net gain on sale of restaurants of $0.8 million for the year ended December 28, 2022.

During fis cal 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee.

This sale resulted in cash proceeds of $4.6 million during the year ended December 29, 2021 and a net loss on sale of restaurants of $1.5 million for the year ended December 29, 2021.

During fiscal 2019, we completed the sale of four company-operated restaurants within the San Francisco area to an existing franchisee, seven company-operated restaurants in the Phoenix area to another existing franchisee and five company-operated restaurants in Texas to a third franchisee.

The three sales during 2019 resulted in cash proceeds of $4.8 million and a net loss on sale of restaurants of $5.1 million for the year ended December 25, 2019.

(f) On July 30, 2014, we entered into the TRA.

This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods.

For the years ended December 29, 2021, December 30, 2020 and December 25, 2019, income tax receivable agreement expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes

attributable to preceding periods.

For the years ended December 28, 2022, December 29, 2021 and December 30, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.

(g) Consists of costs related to the defense of securities lawsuits.

During the year ended December 29, 2021, we received $0.5 million in insurance proceeds, net of legal expenses, related to the derivative complaint.

See Note 13 “ Commitments and Contingencies—Legal Matters "

in the accompanying "Notes to Consolidated Financial Statements"

in this Annual Report.

See Note 13 “ Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

(h) Fiscal 2020 consists of an expense of $2.6 million related to resolution of the longstanding lawsuit involving a contract dispute with one of the Company’s franchisees concerning asserted territory rights, as well as amounts incurred related to the payment of the final settlement amounts for consolidated wage and hour class action lawsuits resolved during fiscal 2020.

For additional information on legal settlements, see Note 13 “Commitments and Contingencies—Legal Matters"

in the accompanying "Notes to Consolidated Financial Statements"

in this Annual Report.

(i) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

For additional information on legal settlements , see Note 13 “Commitments and Contingencies—Legal Matters” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

(i) Consists of costs related to a special dividend declaration.

On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company.

T he special dividend was paid on November 9, 2022, to stockholders of record, including holders of restricted stock, at the close of business on October 24, 2022.

(j) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs.

These are generally incurred over the three to five months prior to opening.

Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.

(j) Includes costs associated with the transition of our former CEO, such as executive recruiting costs and stock-based compensation.

Liquidity and Capital Resources

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Our restaurants do not require significant inventories or receivables.

We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months from the issuance of the consolidated financial statements.

However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement (as defined below) , specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

We believe that these sources of liquidity and capital are sufficient to finance our continued operations, including planned capital expenditures, for at least the next 12 months and beyond from the issuance of the consolidated financial statements.

However, depending on the effects of the COVID-19 pandemic (and its related economic impacts) and macroeconomic conditions, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2022 Credit Agreement (as defined in Note 6 “Long-Term Debt”) , specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.

The following table presents summary cash flow information for the years indicated:

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Financing activities

Net increase in cash

Net (decrease) increase in cash

Operating Activities

In fiscal 2022, net cash provided by operating activities decreased by $13.6 million compared to fiscal 2021.

This decrease was due primarily to lower profitability and unfavorable working capital fluctuations during fiscal 2022.

In fiscal 2021, net cash provided by operating activities increased by $11.6 million compared to fiscal 2020.

This increase was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations for the year ended December 29, 2021.

In fiscal 2020, net cash provided by operating activities increased by $4.4 million compared to fiscal 2019.

This increase was due primarily to favorable working capital fluctuations, partially offset by a decline in profitability after non-cash items for the year ended December 30, 2020 compared to the prior year, which we believe related to the COVID-19 pandemic.

Investing Activities

In fiscal 2022, net cash used in investing activities increased by $6.4 million compared to fiscal 2021.

This increase was due primarily to opening two new company-operated restaurants and remodeling 10 restaurants during the year ended December 29, 2021 compared to opening one new company-operated restaurant and completing two new remodels during the year ended December 30, 2020.

This increase was due primarily to opening four new company-operated restaurants during fiscal 2022 compared to opening two new company-operated restaurants during fiscal 2021.

This was partially offset by cash proceeds of $1.0 million received during fiscal 2022 related to the sale of three restaurants within the Orange County area to an existing franchisee compared to cash proceeds of $4.6 million received during fiscal 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee.

In fiscal 2021, net cash used in investing activities increased by $5.8 million compared to fiscal 2020.

This increase was due primarily to opening two new company-operated restaurants and remodeling ten restaurants during the year ended December 29, 2021 compared to opening one new company-operated restaurant and completing two new remodels during the year ended December 30, 2020.

This was partially offset by cash proceeds of $4.6 million received during the year ended December 29, 2021 related to the sale of eight restaurants within the Sacramento area to an existing franchisee .

In fiscal 2020, net cash used in investing activities decreased by $4.0 million compared to fiscal 2019.

This was due primarily to purchases of property and equipment of $6.7 million in fiscal 2020 compared to $15.4 million in fiscal 2019.

This was partially offset by cash proceeds of $4.8 million received during the year ended December 25, 2019 related to the sale of four company-operated restaurants within the San Francisco area to an existing franchisee and seven company-operated restaurants in the Phoenix area to another existing franchisee.

Capital expenditures for these periods exclude unpaid purchases of property and equipment.

Financing Activities

In fiscal 2022, net cash used in financing activities increased by $6.4 million compared to fiscal 2021.

This change was due primarily to a special dividend payout of $56.0 million during fiscal 2022 partially offset by net borrowings on the 2022 Revolver of $26.0 million, compared to net pay downs of $22.8 million in fiscal 2021.

Additionally, this change was due to a $1.7 million cash inflow related to option exercises during the year ended December 28, 2022, compared to a $0.9 million cash inflow during the year ended December 29, 2021.

In fiscal 2021, net cash used in financing activities decreased by $5.9 million compared to fiscal 2020.

This decrease was due primarily to $22.8 million of net pay downs on the 2018 Revolver (as defined below) during fiscal 2021, compared to net pay downs of $34.2 million in fiscal 2020.

This decrease was due primarily to $22.8 million of net pay downs on the 2018 Revolver during fiscal 2021, compared to net pay downs of $34.2 million in fiscal 2020.

The change was partially offset by a decrease of $5.0 million in proceeds received from the issuance of common stock upon exercise of stock options in fiscal 2021 compared to fiscal 2020.

In fiscal 2020, net cash used in financing activities increased by $4.3 million compared to fiscal 2019.

This increase was due primarily to $34.2 million of net pay downs on the 2018 Revolver (as defined below) during fiscal 2020, compared to net borrowings of $23.0 million in fiscal 2019.

This was partially offset by $48.4 million of cash outflow related to

stock buybacks in fiscal 2019 and an increase of $4.4 million of proceeds received from the issuance of common stock upon exercise of stock options in fiscal 2020 compared to fiscal 2019.

Debt Obligations

Debt and other Obligations

The Company, as a guarantor, is a party to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”).

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The 2022 Revolver and 2022 Credit Agreement will mature on July 27, 2027.

The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate.

The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

At December 29, 2021, $10.0 million of letters of credit and $40.0 million of the revolving line of credit were outstanding.

The amount available under the revolving line of credit was $100.0 million at December 29, 2021.

Borrowings under the 2018 Revolver (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid.

The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%.

For LIBOR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in the range of 0.25% to 1.25%.

For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3% to 1.6%.

The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate.

The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.

The special dividend announced by the Company’s Board of Directors on October 11, 2022 was permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the following sentence.

Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by our past or present officers, directors, or employees (or their estates) upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management,

provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2022 Revolver.

Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid.

The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) Term SOFR with a term of one-month SOFR plus 1.00%.

For Term SOFR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%.

Borrowings under the 2022 Revolver may be repaid and reborrowed.

For borrowings under the 2022 Revolver and 2018 Revolver during fiscal 2022, the interest rate range was 1.4% to 6.0%.

For borrowings under the 2018 Revolver during fiscal 2021, the interest rate range was 1.3% to 1.6%.

The interest rate under the 2022 Revolver was 5.7% at December 28, 2022 and 1.4% under the 2018 Revolver at December 29, 2021.

Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2018 Revolver.

The 2022 Credit Agreement contains certain financial covenants.

The Company was in compliance with all such covenants at December 29, 2021.

During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver.

The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of 1.31%, plus the applicable margin spread, which is currently 1.5%.

The interest rate swap matures in June 2023.

We were in compliance with the financial covenants as of December 28, 2022.

At December 28, 2022, $9.8 million of letters of credit and $66.0 million of the revolving line of credit were outstanding.

The amount available under the revolving line of credit was $74.2 million at December 28, 2022.

During the year ended December 28, 2022, we refinanced and terminated our credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provided for a $150.0 million five-year senior secured revolving credit facility (the “2018 Revolver”) and entered into the 2022 Credit Agreement.

On July 29, 2022, we made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of December 28, 2022 was $66.0 million.

See Note 6 “Long Term Debt” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report for additional information.

In connection with our entry into the 2022 Credit Agreement, we terminated the interest rate swap on July 28, 2022 which was previously used to hedge interest rate risk.

Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge.

In settlement of this swap, we received approximately $0.6 million and derecognized the corresponding interest rate swap asset.

The remaining amount in accumulated other comprehensive (loss) income (“AOCI”) related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.

Material Cash Requirements

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Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used.

Our significant accounting policies are described in Note 2 “Summary of Significant Accounting Policies"

in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

Our significant accounting policies are described in Note 2 “Summary of Significant Accounting Policies” in the accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

Revenue Recognition

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Changes in these estimates and assumptions could materially affect our determinations of fair value and impairment.

We determined that there were no indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2021.

We determined that there were no indicators of potential impairment of our goodwill and indefinite-lived intangible assets during fiscal 2022 and 2021.

Accordingly, we did not record any impairment to goodwill or indefinite-lived intangible assets during the year ended December 28, 2022.

T he ultimate severity and longevity of the COVID-19 pandemic and the extent and duration of any economic downturn is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

Upon the sale or refranchising of a restaurant, we evaluate whether there is a decrement of goodwill.

The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.

The fair value of the portion of the reporting unit disposed of in a refranchising is determined by reference to the discounted value of the future cash flows expected to be generated by the restaurant and retained by the franchisee, which includes a deduction for the anticipated, future royalties the franchisee will pay us associated with the franchise agreement entered into simultaneously with the refranchising transition.

The fair value of the reporting unit retained is based on the price a willing buyer would pay for the reporting unit and includes the value of franchise agreements.

As such, the fair value of the reporting unit retained can include expected cash flows from future royalties from those restaurants currently being refranchised, future royalties from existing franchise businesses and company restaurant operations.

We did not record any decrement to goodwill related to the disposition of restaurants in fiscal 2022, 2021 and 2020.

Long-Lived and ROU Assets

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The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable.

The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s AUV for the last twelve months are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets.

lease period are less than the carrying value of the restaurant’s assets.

If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value.

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We maintain a reserve for estimated claims both reported and incurred but not reported, based on historical claims experience and other assumptions.

In estimating our insurance accruals, we utilize independent actuarial estimates of

expected losses, which are based on statistical analyses of historical data.

In estimating our insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analyses of historical data.

Our actuarial assumptions are closely monitored and adjusted when warranted by changing circumstances.

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The TRA charge expense (benefit) is a permanent add-back to our taxable income.

TRA resulted in less than $0.1 million of expense in fiscal 2021 as a result of the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income , $0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual and $0.1 million of expense in fiscal 2019 as a result of changes to future forecasted results.

TRA resulted in $0.4 million of income in fiscal 2022 and less than $0.1 million of expense in fiscal 2021 as a result of the amortization of interest expense related to the total expected TRA payments and changes in estimates for actual tax returns filed and future forecasted taxable income and $0.1 million of expense in fiscal 2020 as a result of changes to future forecasted results and deduction on 2018 legal settlement accrual .

In fiscal 2022, 2021 and 2020, we paid $0.4 million, $1.7 million and $5.2 million, respectively, to our pre-IPO stockholders under the TRA.

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If we changed our assumptions of stock price volatility or expected lives of our stock options, our stock-based compensation expense and results of operations may be materially different.

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 2 “Summary of Significant Accounting Policies” in our accompanying “Notes to Consolidated Financial Statements” in this Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis